How Biofuel Profiteers Fleece Average Americans

By James D. Agresti
March 12, 2014
Correction appended

By masking the costs of ethanol, certain wealthy biofuel investors advance ideas and polices that line their pockets at the expense of average Americans. An enlightening example of how this occurs is revealed by the way a green energy mogul lashed out at an organization named Intellectual Takeout (ITO) for publishing data from Just Facts about the cost of ethanol.

In December 2013, Just Facts commissioned a nationwide scientific poll to determine what voters understand about public policy issues. This poll contained 19 questions dealing with voters’ knowledge of nine major issues, one of them being energy. Among the energy-related questions was this: “Without government subsidies, which of these fuels is least expensive for powering automobiles? Gasoline, ethanol, or biodiesel?”

The correct answer is gasoline, which only 46% of voters answered correctly, even though the unsubsidized costs of ethanol and biodiesel substantially exceed that of gasoline. As calculated with data from the U.S. Department of Energy and U.S. Energy Information Administration, without federal subsidies, the average nationwide retail price for ethanol in 2013 was 22% more than gasoline, and biodiesel was 41% more than gasoline.

The results of the poll—along with the documentation of the correct answers—were published by various organizations and media outlets that syndicate articles from Just Facts. One of these is ITO, which soon received an email from Eric McAfee, the Founder, Chairman and CEO of Aemetis, a company that manufactures ethanol, biodiesel, and other products. McAfee, whose biography states that he “has founded and funded more than thirty companies,” wrote:

• “Are you being funded by the oil industry and merely a front for there [sic] $100+ million annual budget to protect the 90% gasoline monopoly in the US?”
• “In July 2013, E85 ethanol (97 octane) was sold for $2.99 per gallon retail in the high-cost California market, compared to $3.99 per gallon for premium gasoline (91 octane). Ethanol has traded wholesale at a $0.20 to $1.10 discount to gasoline for many years.”
• “There were no federal subsidies [for ethanol] in 2013.”
• “Please publish a retraction of the error in the same manner as the original article. If you fail to do so, please consider renaming your website ‘Intellectual Fast-Food’, focusing on quick bites of erroneous ‘facts’ that have enormous impacts on government and financial policy.”

In the exchange that followed, ITO president Devin Foley replied that his institute is not funded by oil companies and offered McAfee the opportunity to write a rebuttal, which Foley pledged to publish “so long as the tone and tenor is civil and within reason.” On January 15th, McAfee replied, “We would like to respond to the article, as you suggest.” However, after nearly eight weeks and multiple follow-ups by Foley, McAfee has yet to provide it.

Regardless, McAfee’s email to Foley employed a common ruse used by biofuel proponents to understate the costs of these fuels. This involves comparing the prices of a gallon of ethanol and a gallon of gasoline, even though a gallon of ethanol has 31% less energy than a gallon of gasoline. In practical terms, this means that a car fueled with E85 (a mixture of 70-85% ethanol and 15-30% gasoline) will get 25-30% fewer miles per gallon than the same car when it is fueled with gasoline.

That is why the poll question was worded to ask which fuel is “least expensive for powering automobiles,” not which fuel is “least expensive per gallon.” This question reflects the actual value of a fuel to consumers, not its price for a given volume. In fact, fuels with less energy content per gallon (like ethanol) are an inconvenience to consumers, because they reduce the range that a vehicle can travel between fill-ups.

McAfee is not the only person to use this distorted measure of ethanol costs. For example, a recent article published by both Bloomberg News and the Washington Post reported that “at $1.92 a gallon, ethanol costs refiners 28 percent less than petroleum products used to make gasoline.” The journalists then uncritically quoted Todd Becker, CEO of the multi-billion dollar Green Plains Renewable Energy Inc., who said, “We’re the cheapest molecule in the fuel tank.” What they all fail to mention is that a molecule of ethanol “gives off significantly less energy on combustion than petroleum,” as detailed by a Western Oregon University physics course.

This tangible results of such deceit are spelled out in the U.S. Department of Energy’s Clean Cities Alternative Fuel Price Report. This report explains that illusory savings based on price-per-gallon comparisons typically spur consumers to purchase biofuels, even if this “does not directly translate to savings on an energy-equivalent basis.”

Then there is the matter of subsidies. McAfee wrote “there were no federal subsidies” for ethanol in 2013. While the federal ethanol blending tax credit did expire at the end of 2011, the federal Renewable Fuel Standard still requires refiners, blenders, and importers of transportation fuels to use specified amounts of ethanol and other biofuels. This subsidizes the production of these fuels, because it forces the market to use them, regardless of the costs.

As the U.S. Energy Information Administration has explained, such mandates “offset any cost disadvantage renewable fuels may have over comparable petroleum products in order to achieve the required levels of consumption.” This effectively requires that almost every gallon of gas sold in the U.S. contains about 10% ethanol by volume. Because ethanol is more costly than gasoline, this drives up the price of gas.

In the documentation for the poll and the original version of this article, Just Facts double-counted this subsidy, thus greatly overstating the cost differential between gasoline and biofuels. Just Facts originally reported that without federal subsidies, ethanol and biodiesel were respectively 42% and 64% more expensive than gasoline. In reality, as detailed above, these figures are 22% and 41%.

Consumers and taxpayers ultimately bear the financial burden of these cost premiums, which drain household budgets and harm the broader economy. As the EPA’s National Center for Environmental Economics explains, “Biofuels also tend to require subsidies and other market interventions to compete economically with fossil fuels, which creates deadweight losses in the economy.”

Likewise, as explained by the Institute for Plasma Physics in the Netherlands, the U.S. Department of Agriculture, the Congressional Budget Office, the Congressional Research Service, and the U.S. Government Accountability Office, higher energy costs drive up unemployment, drive down wages, and cause other harmful economic effects. Furthermore, these effects tend to be harsher on poorer nations and individuals, because they spend a greater portion of their incomes on energy than wealthier people.

Even President Obama, who is a staunch proponent of renewable energy, has admitted that higher gas prices negatively impact ordinary people and the economy:

I want gas prices lower because they hurt families. Because I meet folks every day who have to drive a long way to get to work, and them filling up this gas tank gets more and more painful, and it’s a tax out of their pocketbooks, out of their paychecks. And a lot of folks are already operating on the margins right now. And it’s not good for the overall economy, because when gas prices go up, consumer spending oftentimes pulls back.

Nonetheless, biofuel investors financially benefit from such outcomes, because high fossil fuel prices make biofuels more competitive. In the words of Yale Associate Professor Matthew Kotchen, who currently serves as the Deputy Assistant Secretary of Environment and Energy for the Obama administration Treasury Department: “History has shown repeatedly that nothing is worse for renewable energy — and the policies that support it — than cheap and abundant conventional energy.”

There are obviously environmental issues to consider, and some argue that the environmental benefits of biofuels outweigh their added costs. However, there can be no rational basis for such claims unless all of the relevant factors are honestly discussed and critically weighed. Without such clarity, citizens and policymakers will inevitably develop opinions and make decisions based upon half-truths and outright lies that can cause real harm to real people.

Correction (3/14/2014): An earlier version of this article incorrectly stated that without federal subsidies, ethanol and biodiesel were respectively 42% and 64% more expensive than gasoline. As stated in the corrected article above, these figures are actually 22% and 41%.